Can Asia help the world economy? Not yet, not now, but maybe by 2030? :)
Transcript of Can Asia Help The World Economy(1 Jun 09)
Can Asia help the World Economy?
1 June 2009
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Asia’s weight in the global economy has grown Since 1980, Asia’s growth rates have exceeded the world average
Source: IMF, World Economic Database, April 2009
Real GDP Growth, CAGR (1980 – 2008)
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China
Singap
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Taiwan
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Asia
Philipp
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United
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%
5.7%
3.2%
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Asia is attaining economic importance. Since 1980, Asia’s growth rates have exceeded the world average. Japan and China are the world’s second and third largest economies, with India climbing the ranks at number 12.
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0
500
1,000
1,500
2,000
China
Japa
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iaKore
a HKSing
apore
German
yTha
iland Ita
lyFran
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ysia US
Switzerl
and UK
Indon
esia
Billions (USD)
Asia appeared resilient in the midst of crisis
Source: IMF, Data Template on International Reserves and Foreign Currency Liquidity, May 2009
Asian economies have accumulated sizeable reserves
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Seven out of the world’s top ten economies with the largest foreign-exchange reserves are in Asia (China, Japan, India, South Korea, Hong Kong, Singapore and Thailand). As we can see from the chart, this is led by China, with almost US$2 trillion in reserve holdings, and followed by Japan, with about US$1 trillion. This is compared to US and UK, whose reserves are smaller than most of the Asian economies. The lessons learnt from the Asian Financial Crisis have allowed Asia to enter the current crisis from a position of strength; we are more resilient as compared to the past.
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Source: IMF, World Economic Database, April 2009
For now, what Asia can do is limited
Gross Domestic Product
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10152025303540
Trillion (USD)
Asia’s GDP is still small and its industrial structure is export-oriented
Exports as % of GDP
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Asia ex Japan
Developed economies
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Short term However, in the short term, what Asia can do is limited. As a whole, Asia still accounts for only around a fifth of world GDP. Asia’s industrial structure is export-oriented and dependent on global trade.
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Controlling for intra-industry trade, Asia’s trade exposure to the U.S. and Europe has increased
Given its high export exposure…
Sources: IMF, Asia-Pacific Regional Economic Outlook, Spring 2000 and World Economic Outlook database
1 Includes indirect exposures through exports of intermediate and capital goods via third countries
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Controlling for intra-industry trade, Asia’s trade exposure to the US and Europe has increased between 1994 and 2006.
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…and its reliance on the U.S. economy...
Sources: Haver Analytics and IMF staff calculations. 1 Includes China, Hong Kong, Korea, and ASEAN-5
Intra-regional trade remains strongly correlated with U.S. imports
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Even though intra-regional trade accounts for about 50% of Asia’s total trade, Asia’s intra-regional trade remains strongly correlated with US imports. Supplementary Info Intra-regional trade was 51.9% as estimated by IMF (Asia Regional Economic Outlook October 2007)
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GDP Growth (year-on-year %)
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-10
-5
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5
10
15
2001 2003 2005 2007 2009
…the global crisis has hit Asia severely
Change in Exports (year-on-year %)
-50
-30
-10
10
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J2008
F M A M J J A S O N D J2009
F M A
Japan ChinaSouth Korea Taiw anHong Kong Singapore
Sources: CEIC, IMF
Collapse in global trade has impacted growth
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The collapse in global demand for consumer durables and thereafter, for investment goods, has weighed heavily on Newly Industrialized Asia (Taiwan, South Korea, Hong Kong, Singapore), Japan and China Because the export component has been an integral part of their economic structure, the global financial crisis has had an extremely severe impact on the real economy in these countries. Export growth has declined at double-digit rates consecutively for the past few months on a year-on-year basis.
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Source: CEIC
Consumption has grown at a CAGR of 5.6% over the past 20 years …
Asia’s domestic demand is too low to make a major impact. Admittedly, consumption has grown at a compounded annual growth rate of 5.6% between 1987 and 2007.
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High savings culture cannot change overnight…but consumption remains lower than that of advanced countries
Consumption (% of GDP)
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60
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Sing
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Thai
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Mal
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Kor
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Taiw
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Indo
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UK
US
A
Gross Domestic Savings (% of GDP)
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30
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Kong
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Thai
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Mal
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Sing
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Chi
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Sources: CEIC, IMD World Competitiveness Yearbook 2009
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However, consumption as a share of GDP in Asian economies remains low compared to the developed economies. For example, while consumption accounts for about 70% of US GDP, it only accounts for about 35% of China’s GDP. Large portions of the population in China remain without adequate health, unemployment, and disability insurance coverage. The pension scheme also remains weak. Without a well developed social security system, household precautionary demand for savings will remain high and thus cut into consumption expenditure. The government is financing discounts on consumer durables such as distributing shopping vouchers and government subsidies for farmers to purchase consumer products, but there is a natural limit as to how many each household will buy. Substantial and permanent increases in consumer spending will require cultural and social changes but these will not take place overnight.
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Sources: US Department of the Treasury, Treasury International Capital System; IMF World Economic Outlook database
Asia’s fortunes are increasingly intertwined with the U.S. economy
It is in Asia’s interest to cooperate with the U.S.
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Given their close inter-dependence, Asia will work closely with the developed economies to deal with the economic crisis. It is in Asia’s interest to help the US recover. Asia’s holdings of US portfolio securities have increased from around 8% of Asia’s GDP in 1994 to 25% in 2007. US’ holdings of Asian portfolio securities have similarly increased over this period.
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China, in particular, has a large stake in the U.S.With more than a trillion dollars of U.S. assets, China’s main concern will be the risk of inflation and the erosion of its debt value
Source: Bred W. Setser and Arpana Pandey, China’s $1.5 Trillion Bet, May 2009 Update. Estimated using Treasury data.
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China, in particular, will not obstruct the US recovery. As Vice Premier Wang Qishan said in London a few months ago, China and Asia can only bounce back when the US economy recovers. According to the US Treasury, China held US$767.9 billion of Treasury securities as at end March 2009 compared to US$490.6 billion at end March 2008. Brad Setser at The Council of Foreign Relations further estimates that China holds US$1.5 trillion in US assets—about 66% of China’s aggregate portfolio. As such, the ‘nightmare scenario’ in which China sells its entire Treasury portfolio is not likely. A greater worry for China is that American actions to fight the current economic downturn will result in inflation and erode the value of American bonds. The US has also taken steps to improve its relations with China, as evident from Secretary of State Hilary Clinton’s visit to China and Treasury Secretary Timothy Geithner’s statement on April 15, 2009, that ‘The Treasury did not find that any major trading partner had manipulated its exchange rate’. Supplementary Info The Treasury report recognized that between end June 2008 and end February 2009, the RMB had appreciated by 16.6% in real terms, and that China’s fiscal stimulus would help spur domestic demand growth and rebalance the Chinese economy.
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2010-2020: The U.S. will remain dominant
Source: Charles E. Morrison and Peter A. Petri of the East West Center
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Within the next two decades, even under the most benign circumstances, Asia will not be able to pull the same weight as the United States. As these charts suggest, up till 2020, the U.S. will remain dominant, accounting for 28% of world output, 33% of world wealth, 25% of world investment, and 12% of world tertiary enrolment—not too different from its current dominant share. Asia will see some growth: for example, its share of world output will grow from 21% in 2005 to 24% in 2020, but it will still lag the U.S.
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2020-2030: China’s GDP will surpass the U.S.
Projected GDP
US
Japan
China
India
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40,000
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2006 2020 2035 2050
Billions (USD)
US Japan China India
Source: Goldman Sachs, The N-11: More Than an Acronym, March 2007
Projected GDP per Capita
US
Japan
China
India
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25,000
50,000
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2006 2020 2035 2050
…and the gap in GDP per capita will narrow
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Long term But, in the long term, Asia is expected to play a bigger role. By some estimates*, China might catch up with the US to become the world’s largest economy by 2030. [Chart on left] However, within the next 60 years, it is quite unlikely that China will be able to do what the US can do. As we can see [Chart on right], China’s economy in terms of GDP per capita will still be around a quarter that of the US in 2030. India will grow, but the next five years could be a decisive half-decade as Prime Minister Manmohan Singh capitalizes upon the large electoral mandate given to the Congress Party to keep India on the path of reform and address major infrastructural challenges. The rest of Asia is highly diverse. Their impact will depend on the progress of regional integration efforts. Under the ASEAN Economic Community 2015 Blueprint, signed by all 10 ASEAN member countries in November 2007, ASEAN will work towards becoming a single market and production base, allowing for the free flow of goods, services, investment and skilled labour, and the freer flow of capital by 2015. Supplementary Info *Goldman Sachs estimates that China’s GDP per capita will be US$17,522 in 2030, about 28% that of the US’ GDP per capita estimated at $62,717. This is based on the assumption of average growth of 7.7% in 2006-2015, 5.4% in 2015-2020, 4.6% in 2020-2025, 4% in 2025-2030, 3.7% in 2030-2035, 3.6% in 2035-2040, 3.1% in 2040-2045, and 2.5% in 2045-2050.
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China will be the world’s third largest market…
By 2025: the proportion of middle class urban households will double
Source: The value of China’s emerging middle class, The McKinsey Quarterly, 2006 Special Edition
Urban households in China will spend as much as Japan does today
Spending on food will rise the most
Presenter
Presentation Notes
Three key drivers will characterize Asia’s rise: Rising Middle Class, Urbanization and Innovation. Rising Middle Class According to Surjit Bhalla, author of The Middle Class Kingdoms of India and China, Asia currently accounts for 60% of the world’s middle class population. McKinsey estimates that with the proportion of middle class households in China’s urban population growing from 43% in 2005 to 76% in 2025, China could be the third largest consumer market in the world* by 2025. Urban households in China will be spending about 20 trillion RMB annually—almost as much as all Japanese households spend today. Chinese consumerism will be driven by the ‘Phoenix’ generation—the post-1979 generation of some 300 million consumers aged between 16 and 30, with US$135 billion worth of spending power and American spending habits. Beijing has recognized the need to shift to a more domestically oriented economy through social security reforms. In a Wall Street Journal interview in February this year, Premier Wen Jiabao has reiterated that China will “aim to put in place a fairly comprehensive safety net.” For example, on top of the fiscal stimulus, China is going to be spending RMB 850 billion over the next three years to provide universal medical services. This could go some way towards addressing the social and cultural factors that place a limit on spending. * in terms of aggregate private consumption expenditure
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…and India, the world’s fifth largest
Source: McKinsey Global Institute, The ‘Bird of Gold’: The Rise of India’s Consumer Market, May 2007
Middle class will grow from 5% of the population to more than 40%
Presenter
Presentation Notes
Like China, India is poised to undergo a remarkable transformation in the next 2 decades. According to McKinsey, within a generation, the country will become a nation of upwardly mobile middle-class households with increased spending power. This group of households will account for more than 40% of India's population by 2025, a significant increase from 5% currently. Correspondingly, the ranks of the lower income class will fall as India sees a further reduction in poverty. The middle class households will see their incomes grow to 11 times the level of today and account for close to 60% of total Indian income by 2025. This will significantly increase their spending power and accelerate India's shift to a consumer society. In two decades, the country could surpass Germany to become the world's fifth largest consumer market.
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China will hit an ‘urban billion’ by 2030• More than 200 cities with 1 million people•15 ‘super cities’ with 25 million people
• 170 new mass transit systems• Up to 50,000 skyscrapers
Source: McKinsey Global Institute, Preparing for China’s Urban Billion, March 2008
Presenter
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Urbanization According to the International Institute of Environment and Development based in the UK, Asia accounts for 50 of the world’s 100 largest cities. The pace and scale of China’s urbanization is particularly gripping. In the past ten years, China’s urban population increased by 190 million. China added more square meters of urban floor space in 2007 than all the developed countries combined.* If current trends continue, McKinsey has projected that China’s urban population could hit 1 billion by 2030. China could have more than 200 cities with more than 1 million inhabitants each, an additional 170 new mass rapid transit systems and up to 50,000 new skyscrapers—the equivalent of 10 New York Cities. *According to Anil K. Gupta, business school professor in University of Maryland and co-author of the book, Getting China and India Right
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ASEAN’s urban population will also grow
Source: United Nations’ World Urbanization Prospects: The 2005 Revision Population Database
In 2030, 60% of ASEAN’s total population will live in cities
Presenter
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Elsewhere in Asia, the growing ASEAN middle class has been accompanied by an increasing urbanization trend. In the last 20 years, growing urban populations have led to the tripling of consumption expenditure. Middle class populations have more than doubled from 127 million to 260 million. According to Euromonitor, from 2005 to 2009, the total annual disposable income in ASEAN has increased from US$470 billion to almost US$800 billion and the number of internet users has almost doubled from 50 million to 100 million. With the rise of the growing urban middle class, demand for consumer durables, education, healthcare, lifestyle and personal wellness products and services have increased tremendously. For example, in Vietnam, nearly 80% of women wear make-up regularly compared to fewer than 10% ten years ago. Much potential for growth remains in ASEAN. For example, while Vietnamese household computer penetration rate has risen from 9% in 2002 to 21% in 2006, this is still very low compared to the 77% penetration rate in the US.
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1960 1970 1980 1990 2000
Japan Korea China
Barrels per capita
Japan 1960: Per capita GDP USD$7419
China 2008: Per capita GDP USD$1960
Korea 1987: Per capita GDP USD$4049
S EIA CEIC U S C BSources: EIA, CEIC, U.S. Census Bureau
Energy demand will surge The need for sustainable development will call for innovative solutions
Presenter
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With growing urbanization, there will be a need to manage pressures on land, energy, water and other natural resources. The experience of Japan and Korea suggests that energy demand will increase substantially as the economy becomes richer. During the 1960s, Japan's demand for oil surged to about 0.04 barrels per capita. The same also happened to Korea in the 1980s. Likewise, China’s energy demand is expected to surge. According to the Top Management Forum on Energy Security (TMFES), Asia is expected to emerge as the largest energy centre in the world by 2025 as its energy consumption doubles over the next 15 years. This will generate attractive opportunities not only in the supply of energy and related services such as power generation, but also in the development of clean technologies, especially as China and India have become two of the largest contributors of global greenhouse gases.
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Innovation will flourish
1.76
2.08
2.27
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2.62
2.67
2.90
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3.40
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U.K.*
France
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Germany
Taiwan
USA
Switzerland^
Korea*
Japan*
Expenditure on R&D as % of GDP (2007)
Source: World Competitiveness Yearbook. *2006 data; ^2004 data
Asia’s investment in R&D and its abundance of talent will hasten the shift of innovation to Asia
Presenter
Presentation Notes
Innovation Asia has grown in its innovation capacity. Newly Industrialized Asia now spends more on R&D as a percentage of GDP compared to what Britain and France spend. There are emerging centres of excellence for R&D in Asia. For example, MIT’s Technology Review called Microsoft Research Asia in Beijing ‘the World’s Hottest Computer Lab’. The current global recession will hasten the shift of innovation to Asia by accelerating the flow of talent to Asia. More Asian talent have been leaving Silicon Valley in search of opportunities back home. The particular needs of Asia will drive new innovations tailored to Asia’s needs and socio-economic context. The challenge of sustainable development will provide strong impetus for the development of clean technologies. In the case of Singapore, our own strategic need for water has given us unique experience and expertise in integrated water management, which could serve as a model for other countries to consider. Supplementary Info Asia’s rising middle class have triggered ‘frugal innovations’ such as the ‘netbook’. Taiwan’s Asustek brought it to market with Emerging Asia in mind, but it became surprisingly popular with middle class consumers worldwide. This year, Tata launched its Nano car at around US$2000 by implementing an open distribution system in which entrepreneurs are trained to assemble the car, in order to reach rural markets.
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1980Asia: ~20% of world’s GDP
2005Asia: ~35% of world’s GDP
2030Asia: ~45% of world’s GDP
China and India will pull the rest of Asia ahead
Sources: IMF and Australian Treasury estimates
By 2030, Asia’s share of the world’s GDP could be approaching 45%, up from 35% in 2005 and 30% in 1980
Presenter
Presentation Notes
The interaction of the three drivers - a rising middle class, urbanization and innovation - bode well for Asia’s future. The economies of Asia, especially Northeast Asia, are increasingly integrated with China. A rising China will pull the rest of Asia along with it.
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2030-2040: Asia will make a sizeable impact
Source: Goldman Sachs
By 2031-2040, China and India combined could contribute more than 1.5 percentage points to the growth of the World Economy
Presenter
Presentation Notes
By 2040, China and India combined could contribute more than 1.5 percentage points to global economic growth.
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Asia’s future depends on U.S. recovery
Percentage change in growth rate of the country concerned in the event of a 1% rise in the U.S. growth rate
A sustained U.S. recovery would be most favourable for Asia. What the U.S. does between now and the 2012 elections will have a major impact.
Source: IMF Regional Economic Outlook Asia and Pacific April 2008
Presenter
Presentation Notes
Conditions for Growth For Asia to maximize its potential in contributing to the world economy, three key conditions need to be in place. First, the revival of the U.S. economy. What the United States does between now and the 2012 elections will have a major impact on the world economy. The Obama administration’s healthcare reform, tax plan, immigration policies and moves to make it easier for workers to join unions have raised some concerns, as these appear to move America towards the European social-welfare model, which would represent a shift away from the ‘American Dream’. As the Political and Economic Risk Consultancy points out in its 20 May Asian Intelligence report, if the US removes the provision that allows US companies to defer their US taxes until they remit them to the US, its own companies would be put at a competitive disadvantage to companies from countries that do not tax foreign earnings, whether they are remitted or not. A less dynamic America will leave the world worse off and throw a spanner in the works of a smooth transition to the Asian century, one in which Asian demand, innovation and production could be the very growth engine the world will need. �
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Global imbalances need to be corrected
Sources: CEIC, Hong Kong Monetary Authority, June 2007
Asian economies, particularly China, need to improve the balance between savings and consumption
Future consumption share?
Presenter
Presentation Notes
Second, a significant rebalancing of global demand needs to take place to facilitate sustainable global growth. This requires a better balancing of savings and private consumption in emerging Asia. China provides a case in point. As the economy continues to develop and as savings and spending patterns in China adjust along with a rise in income levels, consumption is expected to make a more important contribution to GDP. A Hong Kong Monetary Authority report suggests that China’s experience could be similar to Japan’s, where consumption picked up when income level reached a certain threshold. Private consumption share of GDP in Japan was on a declining trend in the first 15 years of industrialization. Subsequently, as the economy matured, the share of private consumption share in GDP rose and stabilized at more than 50% of GDP. If China presses on with domestic reforms and develops a well-functioning social security system to help reduce precautionary savings and stimulate consumption, it could potentially see a similar trend as its economy develops.
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An open global economy must be maintained
Number of Measures taken between Oct 2008 and Feb 2009
Source: World Bank staff, List of Trade-related Measures, February 2009. Excludes anti-dumping cases.
Trade and investment protectionism will shrink world trade and compound the global recession
Presenter
Presentation Notes
Third, Asia’s continued rise will require a benign trade environment. A concern in recent months is the rise of protectionist tendencies across economies. In March 2009, the World Bank warned of a “worrisome” rise in protectionism. By its count, some 78 trade-restricting measures were proposed and/or implemented from the period October 2008-February 2009. Although the G20 made a pledge to avoid protectionist measures, 17 of them went on to implement 47 measures whose effect is to restrict trade at the expense of other countries. As World Bank President Robert B. Zoellick put it (in a statement in March 2009 urging the G-20 nations to toughen their stance against protectionism), ”economic isolation can lead to a negative spiral of events such as those we saw in the 1930s, which make a bad situation much, much worse.” According to a 2008 study by the Bank of Canada, if the US were to impose import tariffs on Emerging Asia, and if the Asian countries were to retaliate in a similar fashion, both the US and Emerging Asia would experience a permanent decline in GDP growth of 0.6 and 3.8 percentage points respectively. All countries have a stake in maintaining an open global economy during the crisis and avoiding protectionism.
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Details from Goldman Sachs report: The N-11: More Than an Acronym, March 2007